When I explain that they have to indent the else at least one more step, they invariably stare at me in disbelief and vow to henceforth
stay far away from languages where layout has semantic significance. It can actually be somewhat embarassing, and it certainly can
put beginners off.

Strictly speaking, the issue is not tied to the do-notation, but that is where it (almost?) always shows up.

Proposal

Change the syntax for conditionals to

exp -> if exp1 [;] then exp2 [;] else exp3

i.e., add optional semicolons before then and else, making the above example legal.
This has been recently added to jhc, GHC and Hugs, and so far it has not caused any problems.

The second optional semicolon is the important one.
The first one just adds a little more convenience.

Possible addition (this addition is not part of the proposal as accepted for Haskell 2010): Jon Fairbairn suggests that if an optional semicolon is added before then, it would be consistent to also add one before of in case expressions, allowing:

References

Tickets

Pros

Would address a layout issue that manifestly trips up a lot of people, and many experienced Haskell programmers find very annoying.

Trivial to implement

Independent of the layout rule.

Cons

It has been pointed out that improved error reporting could alleviate this issue to some extent, without
any language change. An alternative might thus be to add a section to the report with recommendations
concerning "best practices" for reporting errors related to this issue and other that are known to
cause confusion.

People might actually write these optional semicolons literally
in their code, thus relying on this hack, making it harder to fix the problem in a better way later.